Pound Rises to Two-Month High Against Euro on Cyprus, Italy Woes

The pound rose to a two-month high against the euro as a funding crisis in Cyprus and political deadlock in Italy spurred demand for U.K. assets as a haven.

Sterling trimmed a quarterly decline versus the common currency even as an Office for National Statistics report confirmed the U.K. economy shrank in the fourth quarter, putting the nation on course for another recession. The pound was also boosted after Italy’s Democratic Party leader Pier Luigi Bersani said there was no possibility of a broad coalition to resolve the stalemate. U.K. government bonds advanced, with 10-year securities gaining for a fifth day.

“It’s being driven by euro events, general market risk events rather than anything specifically U.K.,” said Gavin Friend, a currency strategist at National Australia Bank Ltd. in London. “We seem to be in a mindset where the euro is a sell on rallies. Investors have been scared off by the comments coming out of Europe and the measures they are taking.”

The pound gained 0.4 percent to 84.50 pence per euro at 4:51 p.m. London time, after appreciating to 84.42 pence, the strongest since Jan. 24. Sterling has still dropped 4 percent versus the euro this year. The U.K. currency weakened 0.3 percent to $1.5115, leaving it 7 percent lower since Dec. 31.

Cyprus may announce what types of controls it plans to implement today, before banks are scheduled to reopen tomorrow. The country’s leaders are seeking to prevent the flight of money from the island’s lenders, which have been closed for almost two weeks after the European Union forced losses on depositors in exchange for a 10 billion-euro ($12.8 billion) bailout.

Italian Deadlock

Italy’s Five Star Movement, the party led by former entertainer Beppe Grillo, will vote against Bersani in a confidence vote, the party’s chief whips in parliament said in Rome. The deadlock follows inconclusive elections last month.

The 10-year gilt yield fell seven basis points, or 0.07 percentage point, to 1.72 percent, the lowest level since Nov. 13. The 1.75 percent bond due September 2022 gained 0.58, or 5.80 pounds per 1,000-pound face amount, to 100.25.

U.K. gross domestic product contracted 0.3 percent last quarter, the same as previously estimated, the Office for National Statistics said in London. The Office for Budget Responsibility cut its growth forecast last week.

Sterling’s Decline

Sterling has declined 4.8 percent this year, according to Bloomberg Correlation-Weighted Indexes, which track 10 developed-nation currencies. The euro fell 0.3 percent and the dollar rose 3.3 percent.

The indexes show the pound is little changed since March 20, when minutes of the Bank of England’s most recent meeting revealed some officials said further bond purchases may cause an “unwarranted depreciation of sterling,” prompting investors to pare bets on an increase in economic stimulus.

The British currency’s slide against the dollar this quarter will slow because policy makers don’t want to see a disorderly drop, according to David Bloom, global head of currency strategy at HSBC Holdings Plc in London.

“The move to $1.48, or even lower, is going to take from now to the end of the year, or a lot longer,” Bloom said in an interview with Bloomberg Television’s Mark Barton. “The move will still happen lower in sterling, but it will be more controlled.”

U.K. government bonds have returned 0.5 percent this quarter through yesterday, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. German bunds gained 0.1 percent.

To contact the reporter on this story: Lukanyo Mnyanda in Edinburgh at lmnyanda@bloomberg.net

To contact the editor responsible for this story: Paul Dobson at pdobson2@bloomberg.net

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